Weaker wage growth expected this year

Last year wage growth accelerated. This year, however, course of the economy is likely to return wage growth to the previous pace of below 5%. Although wage growth slightly exceeds that of labour productivity, currently it is unlikely to present problems for Latvia's competitiveness.

The average monthly gross wages for full-time job increased by 6.8% in 2014 (the annual growth rate was 6.6% in the fourth quarter); against the usual 4%-5% growth over the past three years, this is a significant acceleration. Taking into account the low inflation and gradual reduction of tax burden on labour, net real wages or the purchasing power of "take home" pay increased by 8.0% - this supported a pick-up in private consumption in the environment of weak external demand.

However, wage growth acceleration appears to be short-lived, and the annual growth in wages this year is expected to moderate to the level below 5%. For instance, despite the growth in minimum wages being similar to the past year's rate (12.5%), its impact on the average wages might be less pronounced, because, in the circumstances of reoccurring sharp hikes in minimum wages and moderation in the economic activity, the motivation for businesses to sidestep increases in lower-paid workers' wages may become stronger. With inflation remaining at a low level and personal income tax cut by 1 percentage point, net real wages, which rose beyond the pre-crisis level already in the past year, are going to increase further.

This year, wage growth will slightly exceed labour productivity gains.At this juncture, it does not translate into competitiveness problems, given the relatively low labour income share in Latvia (in comparison with the EU average) as well as stable profitability indicators and positive developments in Latvia's export shares in imports of other countries.

Speaking about the private sector, remuneration there grew somewhat faster last year, but this year the difference with the public sector is expected to be less pronounced. The dynamics of private sector wages are likely to be more affected by moderating rates of economic growth; in addition, it was the private sector wages that were more affected by such one-off factors as slower employment growth, rounding up of wages due to the euro changeover, etc.